FRAND Royalty Base: Will Chinese Courts More Likely Accept the Component Approach? On Huawei’s Granting of a Cellular IoT SEP License at the Component Level

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On June 17, 2022, Huawei announced it had entered into a patent licensing agreement with Nordic Semiconductor, whereby it would grant its Low Power Wide Area (“LPWA”) cellular Internet of Things (“IoT”) Standard Essential Patents (“SEPs”) to the latter under a component-level license.1 Later on September 13, 2022, Chinese Automotive Technology & Research Center and the China Academy of Information and Communications Technology jointly issued the Guidelines of Standard Essential Patent License for Automotive Industry (2022 Edition), proposing to engage the product unit that makes actual contributions as the calculation basis of SEP royalty. The two events turned up the heat on the ongoing industry debate regarding the component-based calculation of FRAND (Fair, Reasonable, Non-discretionary) royalties.

Advocates for component-based calculation argue that the current end product composition is becoming more complex, leading to the accumulation of patents. If royalties are still based on the pricing of the end product, SEP holders will obtain benefits beyond the inventive value of the patented technology itself, which goes against the underlying principles of FRAND. Therefore, royalties should be based on the value of the component containing the patented technology. Typically, as the Fair Standard Alliance (“FSA”) states in its core principles for FRAND licensing, “a FRAND royalty should reflect the value of the invention. In most cases that means that it should be based on the smallest device that implements those patents . . . .”2 On the contrary, advocates for end-product-based calculation argue that in the traditional communications industry, royalty is based on the selling price of mobile terminals containing SEP technologies. Therefore, the component-level calculation can hardly reflect the full contribution of the patented technology to the products.

At present, Chinese courts have accepted a number of cases related to SEP royalties but have not ruled on the determination of the royalty base yet. It is not difficult to foresee that those who implement the SEP will more actively claim the component-based calculation approach in the trials. This article aims at analyzing Chinese courts’ possible attitude toward the component-based calculation approach. Based on an analysis of the discussion on component-based calculation in international judicial practice, and China’s reality, this article speculates that Chinese courts may be more likely to accept the component approach in FRAND royalty cases.